CHINA S SECURITIES AND FUTURES MARKETS

Transcription

1 CHINA S SECURITIES AND FUTURES MARKETS China Securities Regulatory Commission February

2 CONTENTS PART I. OVERVIEW 3 PART II. SECURITIES MARKET 8 I. Securities Offering 8 II. Listing & Trading of Securities 14 III. Listed Companies 18 IV. Securities Intermediaries and Service Providers 24 V. Investors 28 VI.Securities Self-Regulatory Organizations 34 PART III. FUTURES MARKETS 39 I. Market Overview 39 II. Futures Brokerage Companies 41 III.Futures Self-regulatory Organizations 42 PART V. CHINA SECURITIES REGULATORY COMMISSION 51 PART VI. OPENING UP & INTERNATIONAL COOPERATION 55 ANNEX: Contact Information of Relevant Institutions 61 1

3 DIAGRAM LIST Table 1-1 Summary of China s Securities and Futures Markets ( )... 7 Figure 2-1 Summary of Total Capital Raised at the A Shares Market ( ) Table 2-1 Summary of the B Share Market ( ) Figure 2-2 Ratio of Market Capitalization to GDP ( ) 16 Table 2-2 Number of Listed Companies ( ) Figure 2-3 Breakdown of Listed Companies by Share Capital in Figure 2-4 Summary of Raised Capital by H shares ( ) Figure 2-5 Summary of Investment Funds Issuance ( )...30 Figure 2-6 Net Assets Value & Ratio in Tradable Market Capitalization ( ) Figure 2-7 Shanghai Composite Index( ) Figure 2-8 Shenzhen Component Index( ) Figure 3-1 Trading Volume and Turnover of Futures( ) Figure 3-2 Trading Summary of Futures Market in 2006(based on the nature of futures products) Figure 5-1 Organizational Chart of the State Council Figure 5-2 Organizational Chart of the CSRC Table 6-1 List of MOUs Signed by the CSRC with Overseas Authorities(As of December 2006). 59 2

4 PART I. OVERVIEW China s securities and futures markets 1 have been developing since the late 1970s in tandem with the market reforms and the liberalization of national economy. The first joint-stock company in China, Beijing Tianqiao Department Store Co. Ltd., was founded in August The same month also witnessed the incorporation of Shanghai Feilo Acoustics Co. Ltd., the first Chinese company that went public. In December 1990, Shanghai Stock Exchange and Shenzhen Stock Exchange were both established. China s first listed company, Shenzhen Shekou Anda Industry Co. Ltd 2, had its shares listed on the Shenzhen Stock Exchange on December 1, 1990, which marked the inception of A shares 3. From then on, China s securities and futures markets embark on a rapid track for developments. In China s securities market, besides the A shares, there are also B shares 4 which, first introduced in 1991, are accessible to international investors. As of the end of 2006, there were 1,434 listed companies in China, out of which 109 companies issued B shares; a total of 1,265.5 billion shares were issued with an aggregate market capitalization of RMB 8,940.4 billion (among which the capitalization for tradable stocks amounted to RMB 2,500.4 billion); and million securities investment accounts were opened, mostly by retail investors. The Chinese authorities have been encouraging and nurturing the development of institutional investors. The leading institutional players include 104 securities companies, 58 securities investment fund management companies, 52 Qualified Foreign Institutional Investors (QFIIs), a number of insurance companies, corporate annuities and China National Social Security Fund. The offering and trading of stocks and close-end securities investment fund units are all dematerialized and executed in centralized trading and settlement systems. A multi-tier trading market for bonds has taken shape in China including on-exchange bond market, interbank bond market and OTC market. In July 1981, the issuance of T-bonds was resumed in China and six years later, a secondary market for T-bonds was established and thereafter grows rapidly. In the year 2006, the total issuance of bonds reached RMB billion yuan, a significant increase compared with the RMB 4.9 billion yuan in Apart from the T-bonds, there are also other kinds of bonds available, such as corporate bonds, financial bonds, convertible bonds and short-term corporate notes. China s bond markets consist of exchange bond market and interbank bond market. The 1 In this brochure China refers to the Mainland of the People s Republic of China, excluding Hong Kong SAR, Macao SAR and Taiwan region. The terms capital market and securities and futures markets are both used with roughly the same meaning. 2 First quoted as Shenanda A, the company was restructured and renamed as Beidagaoke. 3 Common shares denominated in RMB 4 Domestically listed common shares quoted in US dollars or HK dollars. 3

5 major players in the exchange bond market are non-banking financial institutions, such as insurance companies, securities firms and other small and medium-sized investors. On the other hand, the interbank bond market is dominated by banking financial institutions with minor involvements of non-banking financial institutions. The commercial banks are the leading players by holding over 60% bonds. Currently the interbank bond market is the major marketplace for bonds whereas the exchange bond market is thinly traded. In 2006, the total turnover of two bond markets amounted to RMB trillion (the interbank bond market accounted for RMB 9.97 trillion, roughly 98.45%;and the exchange bond market registered RMB 156 billion, or 1.55%). As of 2006, the outstanding bonds aggregated RMB 9.2 trillion (the treasures accounted for RMB 2.9 trillion, policy-related financial bonds registered RMB 2.5 trillion and central bank notes amounted to RMB 3.2 trillion). Currently there are 1 financial futures exchange, 3 commodity futures exchanges and 183 futures brokerage companies in China. Thirteen futures contracts, mainly on agricultural products (soybean, grain and cotton, etc.) and industrial products (copper, aluminum and fuel oil, PTA, etc.), are traded on the exchanges. In 2006, the futures trading volume reached 449 million lots with the turnover amounting to a record RMB 21 trillion yuan(two-way calculation). Currently, warrants are the only financial derivatives 5 available on China s capital market. More financial derivatives like stock index futures, T-bonds futures and options are expected to emerge as China Financial Futures Exchange, the first of its kind, was founded in September While supporting the steady growth of domestic markets, the Chinese authorities also encourage Chinese enterprises to access international capital markets. In 1993, Tsingtao Brewery became the first Chinese company listed in Hong Kong (H-shares 6 ). As of the end of 2006, 143 domestic companies had issued H-shares and got listed on the international capital markets, raising a total capital of US$ billion. Meanwhile, China s securities market is opening wider to the outside world. International investors have been allowed to invest into China s B shares market since In 2002, foreign institutions were allowed to invest directly into China s A shares market via the Qualified Foreign Institutional Investor (QFII) scheme. Besides, eligible foreign companies can offer and list A shares in China s market since Foreign companies are also allowed to take over Chinese listed companies since Chinese securities service industry has also been opening up gradually in recent years. By the end of 2006, 7 licensed joint venture securities companies and 24 joint venture fund management companies had been licensed. Participation by international investors has 5 In October 1993, T-bonds futures on the Shanghai Stock Exchange were open for public trading. Given the immaturity of the futures market characterized by excessive market manipulation and speculations, the State Council of China ordered the suspension of T-bonds futures in May H-shares are shares issued overseas by the domestically listed Chinese companies. 4

6 helped to promote Chinese capital market, in the meantime brought in long-term funds for the growth of Chinese companies. Plus, advanced investment philosophies and good expertise are accompanied into the market. In terms of legal framework, a number of major laws such as Company Law 7,Securities Law 8 and Securities Investment Fund Law have been passed. Besides, the CSRC, along with other authorities, has issued supplemental regulations, administrative rules, guidelines and codes (e.g. Provisional Regulations on Public Offering and Trading and Measures on the Administration of Futures Exchanges). Chinese capital market is at a critical turning point. Further reforms and developments will unfold in an effort to optimize the market functions, improve infrastructures and enhance efficiency and competitiveness. Since the promulgation of Guidelines on Promoting Reform, Opening Up and Steady Developments of the Capital Market by the State Council (China s Cabinet) in early 2004, a series of key measures have been adopted, such as: the reform on non-tradable shares 9 has been advancing smoothly, which paves way for full-scale market-oriented functioning of infrastructures; controlling shareholders are pressed to disgorge illegal appropriation of funds from listed companies, which facilitates these companies operations and profitability; historical leftover risks in securities industry have been largely dissolved while high-quality securities firms are witnessing dynamic growths; diversified institutional investors have taken shape, which lays a foundation for steady operations of capital market; the legal framework as well as the regulatory enforcement capacities are further enhanced; and market-oriented public offering system is being developed with higher efficiencies. China Securities Regulatory Commission (CSRC) is the competent authority supervising the securities and futures markets in mainland China. In 2007, the CSRC will focus on the following mandates: 1. to keep on promoting the market infrastructures, deepen all kinds of reforms in an effort to solve the structural and mechanism problems, and lay a solid foundation for sound market developments; 2. to facilitate the buildup of multiple market structures. Top-quality large enterprises and fast growing small and medium-sized enterprises are encouraged to go public so that the main board is home to a sufficient number of top companies with higher corporate governance standard and investment values. Growth Enterprise Board (venture market) will 7 The Company Law was released on Dec and took effect on July Its latest amendments were approved on Oct and became effective on Jan. 1, The Securities Law was promulgated on Dec and took effect on July Its latest amendments were approved on Oct and became effective on Jan. 1, Before the reform, the A shares were divided into tradable and non-tradable shares based on their tradability at stock exchanges. The reform is aimed to eliminate such a division for well-functioning market infrastructures and orderly operations. A pilot program was introduced in late April 2005 and followed by a full-swing reform thereafter. 5

7 be established to finance the high-tech, innovative enterprises. The Share Transfer System (STS) will be given more functions in an effort to develop the over-the-counters (OTCs) in China. 3. to perfected market infrastructure and operations. Market-oriented public offering system will be improved to ensure that market itself plays a bigger control role in financings. Trading system will be updated in view of the largely increasing amount of tradable shares. Financial derivatives like stock index futures are to be traded soon in the market to give a full play to price discovery function. 4. to develop the corporate bond market. The regulatory framework and issuance system of bond market will be improved with an increasing portion of corporate bonds in direct financing. Firstly, the issuance of bonds will be more market-oriented. Secondly, the credit rating agencies for bonds are to be nurtured. Securitization such as asset-backed securities is among the priorities. A stronger interlink will be build between exchange bond market and interbank bond market for coordinated growths of capital and monetary markets. 5. to tighten market supervisions. Firstly, the supervision over post-non-tradable share reform listed companies will be focused on information disclosure, market transactions and behaviors of controlling and beneficiary shareholders. Secondly, the risk control indicator system, risk alert system and internal control system in securities firms will be put in place and improved with an emphasis on risk control and compliance of routine operations. Thirdly, supervision over fund management companies will be enhanced for the industry s sound and sustainable growths. Fourthly, supervision over intermediaries like accounting firms will be tightened for authentic and timely information disclosures. As the non-tradable shares reform and consolidation campaign over securities firms are approaching an end, China s capital market has achieved increasing improvements on market infrastructures and systems. Following several years of adjustments, the market has witnessed encouraging developments and a new era for sound and rapid growths is on the horizon. 6

8 Indicator Year No. of domestic listed companies (A,B shares) Table 1-1 Summary of China s Securities and Futures Markets ( ) No. of B share companies No. of H share companies Total shares issued (100 million shares) Tradable shares (100 million shares) Total stock market cap. (RMB 100 million yuan) Market cap. of tradable shares (RMB 100 million yuan) Total stock trading volume (100 million shares) Total stock turnover (RMB 100 million yuan) Shanghai Stock Exchange Composite Index (close price) Shenzhen Stock Exchange Composite Index (close price) Securities accounts (10 thousand) Amount issued of T-bonds (RMB 100 million yuan) Amount issued of enterprise bonds (RMB 100 million yuan) Cash T-bonds turnover (RMB 100 million yuan) Repurchase T-bonds Turnover (RMB 100 million yuan) No. of Securities investment funds Amount issued of securities investment funds (RMB 100 million yuan) Turnover of securities investment funds (RMB 100 million yuan) Futures transaction volume (10000 lot) Futures turnover (RMB 100 million yuan ) s Blanks in the charts represent that data are not available or existing. For the data related to shares, both A shares and B shares are covered

9 PART II. SECURITIES MARKET I. Securities Offering 1. Stocks i. The A share market The A shares refer to the common shares issued by the companies incorporated and registered in Mainland China and traded by domestic entities or retail investors (excluding investors from Taiwan region, Hong Kong and Macau SARs) in Chinese currency. A company applying for a public offering of A shares has to submit its application to the CSRC and meet the requirements stipulated in the Company Law, Securities Law, Provisional Regulations on the Administration of Issuing and Trading of Stocks, and other relevant laws and regulations. An issuer can choose either a public or non-public offering. Below are several kinds of public offering: A public offering of securities to unspecified investors; A public offering of securities to accumulatively more than 200 specified investors; A public offering as prescribed by any law or administrative regulation. Advertising, public inducement or public offerings in any disguised form are forbidden in non-public securities offerings. The public offering of stocks may be used to initiate a joint stock limited company, to make initial public offerings (IPOs) of established companies or follow-on offerings of listed companies. To initiate a joint stock limited company means to establish such a company via public issuance of stocks for financing. The promoter subscribes a significant portion of the shares while the rest are offered to the public. Such a public offering shall meet the following requirements as prescribed in the Company Law as well as other requirements of the CSRC. There shall be no less than 2 but no more than 200 promoters, of whom half or more shall have domiciles in China; The shares subscribed by the promoters shall be no less than 35 % of the total shares. According to Article 13 of the Securities Law, an IPO of a company shall meet the following requirements: - 8 -

10 Have a complete and well-functioning organizational structure; Capable of making profits continuously in a sound financial condition; No record of false financial statements over the past 3 years, no record of other wrongdoings; and Meeting other requirements as prescribed by the CSRC. Listed companies can issue additional shares to the public by placing shares to their existing shareholders (hereinafter referred to rights issue ) or by offering additional shares to the public (hereinafter referred to as follow-on offering ). Both methods should comply with the Article 13 of the Securities Law. The following review and approval procedures are adopted by the CSRC: The issuers are required to make public their application documents after being accepted by the CSRC; The Public Offering Supervision Department of the CSRC conduct preliminary reviews on the application documents; The application documents are subject to the review and examination of the Public Offering Review Committee 11, which comprises both the CSRC staff and external experts. The Review Committee members vote by majority in order to recommend to the CSRC for a public offering; Taking into consideration the recommendation of the Review Committee, the CSRC finally decides whether to approve a public offering or not. The current pricing mechanism for a public offering is a market-oriented one. Developing from the fixed pricing, P/E ratio-based pricing and controlled P/E ratio-based pricing, the Inquiry Pricing System is introduced on a trial basis from 1 January It is in essence a book-building pricing system which generally involves two stages. In the first stage, the issuer and its sponsor propose an initial price band to solicit price offers from institutional investors 12. After receiving the first round of feedback, the issuer and the lead underwriter will adjust the price range and offer it to the institutional investors for a second-round feedback which sets the final price of the offering. As of the end of 2006, listed companies in China had issued a total of billion A shares, raising RMB 1,100 billion yuan in total. For the sake of reform on non-tradable shares, the IPOs and follow-on offerings of shares were suspended between April 2005 and April 2006 and resumed in May 2006 following the initial success of the reform. 71 companies made IPOs in the year 11 The Public Offering Review Committee is now composed of 25 members. Five of them are the CSRC staff and the rest are non-csrc experts. The tenure of a committee member is one year and the consecutive tenure shall be no more than 3 terms. Some of them are full-time members. 12 Here refers to the securities investment fund management companies, securities firms, trust & investment firms, financial companies, insurance companies and QFIIs

11 2006, raising about RMB billion; 2 companies made rights issue, raising RMB 432 million; and another 45 companies made follow-on offerings, raising RMB billion yuan. Figure 2-1 summarizes the capital raised from the A share market in Figure 2-1 Summary of Total Capital Raised at the A Shares Market ( ) RMB 100 mil IPOs rights issues followup offerings convertible bonds Source: the CSRC ii. The B share market The inception of B shares marks the first step of internationalization in China s capital market. Like the A shares, the B shares are also issued by joint-stock companies registered in China and listed on Chinese stock exchanges. The B shares are denominated in Chinese currency, but subscribed and traded in foreign currencies. Since 1992, the B shares have been issued and traded on both Shanghai (in US dollars) and Shenzhen (in HK dollars) Stock Exchanges. Domestic citizens are allowed to trade B shares in foreign currencies from February Therefore, the B share market enables Chinese companies to raise foreign currencies from both Chinese and international investors. In accordance with the Company Law, the Securities Law, the Provisional Regulations on the Administration of Issuing and Trading of Stocks and State Council Rules Regarding the Domestic Listing of Foreign Owned Shares, B share issuers shall meet the following requirements: the capital raised by issuing B shares shall be used in a manner consistent

12 with state industrial policy; to comply with regulations regarding fixed-asset investments; to comply with regulations on foreign investments; the promoters must hold at least 35% of the issued shares at the time when the company is set up; the capital contributions by promoters shall be no less than RMB 150 million yuan; the company must float at least 25% of the company's total shares; in the case of a company's total share capital exceeding RMB 400 million yuan, the public floating requirement may be reduced to no less than 15% of its total shares; Neither (a) any predecessor entity (entities) of which the joint-stock company is a part of; nor (b) any major promoter who is a state-owned enterprise, have committed any significant breaches against laws over the past three years; As of the end of 2006, 109 companies had issued a total of billion B shares, raising RMB billion yuan. 86 of these companies also issued A shares. For more information on the B share market, please refer to Table 2-1. Table 2-1 Summary of the B Share Market ( ) Number of B share companies Market cap. of B share companies (RMB 100 million yuan) Market cap. of tradable B shares (RMB 100 million yuan) Trading volume of B shares (100 million shares) Turnover of B shares (RMB 100 million yuan) Source: Shanghai and Shenzhen Stock Exchanges

13 2. Bonds The issuance of bonds such as T-bonds, financial bonds and corporate bonds are subject to the approval of government authorities other than the CSRC. The issuance of convertible bonds and bonds of securities companies are subject to the approval of the CSRC and shall meet the following requirements. i. Convertible bonds Convertible bonds refer to the corporate bonds which can be converted into shares under certain pre-agreed conditions. The issuance of convertible bonds should meet the requirements for new public offering as prescribed in Article 13 of the Securities Law, plus the following requirements regarding corporate bonds in Article 16: The net asset of a joint stock limited company is no less than RMB 30 million yuan and the net asset of a limited-liability company is no less than RMB 60 million yuan; The accumulated outstanding bonds constitute not more than 40 % of the net assets of a company; The average annual distributable profits over the latest 3 years are sufficient to pay 1-year interests of the bonds; The raised funds are invested in a manner consistent with the state industrial policies; The interest rate of bonds does not exceed the band of interest rates as set by the State Council. The funds raised through public issuance of corporate bonds shall be used for the verified purposes only and shall not be used to cover any deficit or non-production expenditures. ii. Bonds issued by securities companies This type of bonds is issued by securities companies which agree to redeem both principals and interests within a certain period of time. Such bonds can be issued to the public or to qualified investors via private placement. The issuance of bonds by securities companies is subject to the review and approval of the CSRC. Aside from the requirements as prescribed in the Securities Law, the securities company issuing bonds should also comply with the following requirements: The latest un-audited assets shall be no less than RMB 1 billion yuan; The company made profits in the preceding year; All risk control indicators have met the requirements as prescribed by the CSRC;

14 No material violation of laws or wrongdoing has been committed during the past 2 years; The shareholders meetings and the Board of Directors are in sound operation and internal control systems are working effectively with proper business firewalls and internal control technical support; Assets of the company have not been misappropriated by any controlling natural person, legal person, other organization or related party; and Other requirements as prescribed by the CSRC. Securities companies that apply to issue bonds via private placement should comply with not only the requirements specified in the Securities Law, but also the above-mentioned requirements numbered c),d),e),f) and g). Meanwhile, the securities companies should also have latest un-audited net assets of no less than RMB 500 million yuan. Private placement can only be offered to the qualified investors capable of independent analysis and risk control over bond investments, and must meet the following requirements: It is a legal person or investment entity; It can invest on bonds according to related regulations and its articles of association; It has more than RMB 10 million yuan of registered capital and over RMB 20 million yuan of un-audited net assets

15 II. Listing & Trading of Securities 1. Listing of Securities According to Article 39 of the Securities Law, publicly issued stocks, corporate bonds or other securities shall be listed in a stock exchange or other securities marketplaces as approved by the State Council. A listing application shall be filed with a stock exchange for its review and approval. i. Listing of stocks A joint stock limited company applying for a listing of securities shall meet the following requirements: The stocks have been publicly issued upon the approval of the CSRC; Its total share capital shall be no less than RMB 30 million yuan; The publicly issued shares shall exceed 25 % of the total shares; where the total share capital exceeds RMB 400 million yuan, the publicly issued shares shall be no less than 10% thereof; and The company shall commit no material violations of laws or false financial statements over the last three years. A listing agreement shall be signed by an exchange and a listing applicant which mainly covers: the code of conducts requirement on the listed company, listing fees, suspending or terminating the listing, services provided by the exchange, etc. In other words, such an agreement sets forth and governs the relations between the listed company and the exchange. ii. Listing of corporate bonds A company applying for a listing of corporate bonds shall meet the following requirements: The maturity of the corporate bonds shall be more than 1 year; The actual issuance is no less than RMB 50 million yuan; Meeting the issuing requirements. The listing of convertible bonds, in addition to the above requirements, shall meet the requirements for public offering of stocks as well. 2. Trading of Securities market size. As of the end of 2006, the market capitalization of China s stock market reached RMB 8,940.4 billion yuan, equivalent to 44% of China s GDP. The market capitalization for the tradable shares amounted to RMB 2,

16 billion yuan, roughly 12.3% of the GDP (see Figure 2-2). The turnover of exchange-traded bonds registered RMB 1.8 trillion yuan, of which the turnover of T-bonds, corporate bonds and convertible bonds accounted for 92.64%, 5.34% and 2.02% respectively. The turnover of bonds repurchase accounted for more than 89% of the total bond turnover. trading instruments. Currently the following financial instruments are available for trading on the stock exchanges: stocks (both A shares and B shares), bonds (cash T-bonds, T-bonds repo, cash corporate bonds, corporate bonds repo and convertible bonds) 13, securities investment funds (close-ended funds, open-ended funds, ETF, LOF) and warrants, etc. market participants. The major market participants include securities companies, insurance companies, securities investment fund management companies, trust & investment companies, non-financial institutional investors, and retail investors. means of trading. Securities are traded on stock exchanges where an open, centralized and computerized matching method is adopted based on the principle of price precedence and time precedence. Other means of trading include collective bidding and block trading bidding. The block trading can be adopted for large-volume stock transactions (no less than half a million shares for A shares). trading fees. Investors purchase or sell securities through the brokerage of securities companies. The commissions 14 paid to securities companies shall not be higher than 3 of the trading value (but no lower than the total amount of the trading regulatory fee and the charges by the stock exchanges). Furthermore, according to the prevailing taxation law, both buyers and sellers are levied a stamp duty of 1 of the trading value. daily caps on the stock fluctuations. At present, except Specially Treated Shares (shares of listed companies in poor financial or operating conditions that require special treatments) which are subject to the daily price limit of ±5%, all other shares are subject to the daily price limit of ±10%. registration and clearing. The registration and clearing of securities are centralized through China Securities Depository and Clearing Corporation Ltd. (CSDCC). Before trading on a stock exchange, an investor must place all the 13 Bonds at the interbank market include T-bonds, financial bonds, corporate bonds, convertible bonds, short-term corporate notes and international bonds. 14 For any trading value (of A shares or securities investment funds) less than RMB 5 yuan, the minimum commission is RMB 5 yuan. For trading value of less than US$1 or HK$5 (of B shares), the minimum commission is US$1 or HK$

17 securities (fully dematerialized) into an account opened with the CSDCC. Currently, the settlement for A shares is T+1 and the settlement for B shares is T+3. market indices. The commonly cited stock indices include Shanghai Composite Index, Shanghai 50 Index, Shanghai 180 Index, Shenzhen Component Index, Shenzhen Composite Index and SME Index, etc % Figure 2-2 Ratio of Market Capitalization to GDP ( ) market cap./gdp Source: the CSRC market cap.of tradable shares/gdp 3. Delisting of Securities i. delisting of stocks Where a listed company is under any of the following circumstances, the stock exchange shall suspend the listing of its stocks: Where the share capital or shareholding structure of the company changes and thus fails to meet the listing requirements; Where the company fails to publicize its financial statements or contains false information in its statements which may mislead the investors; Where the company has committed any major wrongdoing; Where the company has been operating at a loss for the latest 3 consecutive years; or Under any other circumstance as prescribed in the listing rules of the stock exchange. Where a listed company is under any of the following circumstances, the stock exchange shall terminate the listing of its stocks:

18 Where the total amount of share capital or shareholding structure of the company changes and thus fails to meet the listing requirements, and still unable to meet the listing requirements after the rectification period set by the stock exchange; Where the company fails to publicize its financial statements or contains false information in its statements, and refuses to rectify; Where the company has been operating at a loss for the latest 3 consecutive years and fails to make profits for another year; Where the company is disbanded or is declared bankrupt; or Under any other circumstance as prescribed in the listing rules of the stock exchange. When the stocks of a listed company are de-listed from an exchange, they have to be transferred to a special trading system--share Transfer System (STS). The STS is an independent system where securities companies provide brokerage services for the shares of de-listed joint-stock companies. The first company in STS was quoted on July 16, As of the end of 2006, 59 companies were quoted on STS. ii. de-listing of corporate bonds After the listing, where the bond issuer is under any of the following circumstances, the stock exchange may suspend the listing of its corporate bonds: (1) Where the company has committed any wrongdoing; (2) Where a major change takes place in the company which fails to meet the listing requirements; (3) Where the funds raised through the issuance of corporate bonds are used other than the verified purposes; (4) Where the company fails to fulfill its obligations according to the covenant of corporate bonds; or (5) Where the company has been operating at a loss for the latest 2 consecutive years. Where a company is under any of the circumstances as described in item (1) or (4) of the preceding Article with deemed serious violations, or where a company is under any of the circumstances as described in item (2), (3), or (5) of the preceding Article and fails to rectify within a specified timeframe, or where a company is disbanded or declared bankrupt, the stock exchange shall terminate its listing of corporate bonds

19 III. Listed Companies 1. Domestically-listed Companies i. Overview The domestically-listed companies have been growing rapidly. In 1990 there were only 10 listed companies in China. But by the end of 2006, the number had already reached 1,434, of which 1,293 companies issuing A shares only, 23 companies issuing B shares only, 86 companies issuing both A shares and B shares, and 32 companies issuing both A and H shares (see Table 2-2 and Figure 2-3). The share capital of domestically listed companies is mostly between RMB 100 million and RMB 1 billion yuan, with only 138 listed companies owning more than RMB 1 billion yuan of share capital. Table 2-2 Number of Listed Companies ( ) Issuing A shares only Issuing A and H shares Issuing A and B shares Issuing B shares only Total Source: the CSRC Listed companies are located in different parts of Mainland China and across various industrial sectors (mainly machinery, metallurgy, chemicals, electronics, infrastructure, transportation, energy and finance). As of 2006, the share capitals of all listed companies amounted to billion shares, of which billion shares were tradable, accounting for 27.2%

20 Figure 2-3 Breakdown of Listed Companies by Share Capital in No.of Co Under 100 mil yuan Source: the CSRC mil mil mil mil over 1 bil Shanghai Shenzhen Listed companies are the footstone of Chinese capital market. Their overall quality directly determines market attraction and competitiveness as well as serves as a key link for sustainable growths. In order to raise the overall quality, efforts will be based on maximization of all shareholders interests. Listed companies are urged to improve their corporate governance and management, and to strive for higher creditability, transparency, profitability and sustainability. The overall improvement of corporate operations changes China s capital market into a favorable venue for investments. In recent years, the following measures have been taken targeting common problems in listed companies with desirable outcomes. Structural reforms are made to foster common ground of interests for both controlling and minority shareholders in listed companies; System improvements are also made to facilitate the compliant operations of listed companies; Efforts are made to create favorable external environments for operations of listed companies; Measures are taken to improve the composition of listed companies by adjusting the existing share capital and optimizing incremental share capital;

21 Efforts are also made to establish an all-around multi-level regulatory regime. In general, China s dynamic economic growths and implementations of the above-mentioned measures lead to increasingly favorable environments for listed companies to develop. The listed companies are becoming the industry leaders in Chinese economic growths. ii. Regulatory framework The CSRC s supervisions over listed companies cover information disclosure, corporate governance, related parties transactions, M&A, etc. A geographically-based supervisory system has been adopted in supervising listed companies. The Listed Company Supervision Department of the CSRC shoulders the major responsibilities including rules making, policy studies, regulatory coordination, inspection and supervision of regional bureaus and stock exchanges, etc. A local regulatory bureau is responsible for daily supervision of the listed companies within its jurisdiction. Its major tasks include on-spot inspection, risks detection and disposal, etc. Corporate governance, information disclosure, M&A and refinancing of listed companies are also subject to the routine supervision of local regulatory bureaus. Stock exchanges are the forefront regulators as many important issues in relation to a listed company, such as information disclosure, risk warning, suspension, resumption and termination of listing, are subject to their supervision. a) Information disclosure. The information disclosed by issuers and listed companies shall be authentic, accurate and complete and shall contain no false, misleading statement or major omissions (Article 63, Securities Law). The information disclosed by a listed company can fall into 3 categories: public offering information, periodic reports, and ad hoc reports. The public offering information includes prospectus, stock listing announcement, bonds issuance scheme and bond listing announcement, etc. Periodic reports include annual reports, interim reports and quarterly reports. In the case of a material event, the listed company shall immediately submit an ad hoc report to the CSRC. Such routine reports as notification of shareholders meeting and its decision can also be regarded as ad hoc reports. b) Corporate governance. The Code of Corporate Governance for Listed Companies was issued in January The Code sets forth, among others, the basic principles for corporate governance of listed companies, including:

22 Independent Directors. A listed company shall introduce independent directors to its board of directors. In a domestically listed company, independent directors shall accountant for at least one third of the board. Related party transactions must be endorsed by independent directors. As of the end of 2006, almost all listed companies had introduced independent directors to their boards. Independence of Listed Company. A listed company shall be separate from its controlling shareholders in such matters as human resources, assets and financial affairs and independent in organization, businesses and accounting issues to independently bear risks and obligations. Specialized Committees. The board of directors may establish a strategy committee, an audit committee, a nomination committee, a remuneration committee and an appraisal committee pursuant to the resolutions of shareholders' meetings. The audit committee shall have at least one accounting professional as its independent director. c) Related party transactions 15. Timely information disclosure is required by the CSRC, whereas the transaction value between a listed company and its related natural person exceeds RMB 300,000 ;or the transaction value between a listed company and its related legal person 16 exceeds RMB 3 million yuan and accounts for 0.5% or above of the latest audited net assets of the listed company. The director representing a related party shall withdraw from voting when the board or the shareholders meeting is deliberating and voting on the related party transaction. d) Mergers & Acquisitions. Investors can acquire a listed company by a public offer, agreement-based offer and other legitimate ways. In such an acquisition, the stocks of the target company held by an acquirer cannot be transferred within 12 months following the acquisition. 2. Overseas Listed Companies i. Overview On July 15, 1993, Tsingtao Brewery Co. Ltd. was successfully listed in Hong 15 Related party transaction refers to the issues regarding resources or obligations transfers between a listed company or a subsidiary under its control and its related party. 16 Please refer to Rules on Stock Listing issued by stock exchanges for the definitions of related natural person and related legal person

23 Kong, which marked the first overseas listing by a Chinese enterprise. As of the end of 2006, a total of 143 domestic companies had issued shares overseas, raising US$ billion in total (see Table 2-4). 126 of them were listed only on the Hong Kong Exchanges and Clearing Ltd. (including 47 stocks at GEM); 10 dually-listed in Hong Kong and New York; 4 dually-listed in Hong Kong and London; 1 triply-listed in Hong Kong, New York and London; and 2 solely listed in Singapore. Table 2-5 shows the equity structure of overseas listed companies as of the end of Previously the overseas listed companies were primarily large SOEs that were critical to the national economy. Recently, with the increasing overseas listing of small and medium-sized enterprises (SMEs), particularly privately owned enterprises, these companies have exhibited truly diversified ownership structures and industrial sectors with a higher degree of transparency and compliance. These companies have not only raised a significant amount of capital, but also optimized the capital structure and corporate governance. Figure 2-4 Summary of Raised Capital by H Shares ( ) USD 100 mil raised capitals No.of IPOs Source: the CSRC ii. Requirements for applying to list in overseas main boards Where a domestic enterprise directly or indirectly issues or lists any securities abroad, it is subject to the CSRC s approval according to the Article 238 of Securities Law. After restructuring into joint-stock companies, all state-owned companies, collectively-owned companies and enterprises of other ownership that have met the specific requirements are entitled to apply for overseas listing

24 A listing at overseas main boards shall meet the following requirements: The capital raised shall be used in a manner consistent with the state industrial policy and compliant with regulations regarding fixed-asset investments as well as foreign investment policies; The company must own a net capital of no less than RMB 400 million yuan; with no less than RMB 60 million yuan of post-tax profits. Meanwhile, it shall have great potentials for growth based on reasonable P/E ratio, and the capital raised shall be no less than US$ 50 million; The company has a sound corporate governance and internal control regime, sufficient senior executives with acceptable management skills; The company has reliable foreign exchange resources for dividends distribution

25 IV. Securities Intermediaries and Service Providers 1. Securities Companies 17 Securities companies are the leading intermediaries in China s capital market. By the end of 2006 there were 104 securities companies with roughly 3000 retail outlets nationwide under the supervision of the CSRC, regional regulatory bureaus, stock exchanges, securities association and the securities depository & clearing house. The CSRC s supervisions over securities companies cover their establishment, business scope, capital adequacy, risk control indicators, internal control and clients funds management, etc. The Intermediary Supervision Department of the CSRC shoulders the major responsibilities including rules making, policy studies, regulatory coordination, etc. A local regulatory bureau is responsible for daily supervision of the securities companies (and their branches) registered within its jurisdiction regarding their brokerage, proprietary and asset management businesses. Such matters as corporate governance, internal control, risk disposal plans and senior management are also subject to the routine supervision of local regulatory bureaus. The trading activities of securities companies are directly under the surveillance and supervision of stock exchanges. China Securities Depository and Clearing Corporation Ltd., while providing depository and clearing services to securities firms, is also responsible for controlling risks in these areas. i. Establishment requirements. A securities company shall apply to the CSRC for a license provided that it meets the following requirements: Its major shareholders have the ability to make profits continuously, have a good reputation, and commit no major violation of laws or wrongdoings over the past 3 years with a net asset of no less than RMB 200 million yuan; Its registered capital satisfying the provisions of the Securities Law; Have a sound risk control system as well as an internal control system; and Meeting any other requirement as prescribed by laws and regulations as well as by the CSRC. ii. Business scope. A securities company may undertake some or all of the following businesses upon the approval of the CSRC: (1) Securities brokerage; (2) Securities investment consultation; (3) Financial advising relating to securities trading or securities investment; (4) Underwriting and sponsorship of securities; 17 They are often termed as investment banks in the United States, or merchant banks in the United Kingdom

26 (5) Securities proprietary trading; (6) Securities asset management; and (7) Any other business concerning securities. iii. Registered capital. Where a securities company engages in the business operations as prescribed in the abovementioned item (1), (2) or (3), its registered capital shall be no less than RMB 50 million yuan. Where a securities company engages in any of the business operations as prescribed in item (4), (5), (6) or (7) therein, its bottom-line registered (paid-in) capital shall be RMB 100 million yuan; Where a securities company engages in two or more business operations as prescribed in item (4), (5), (6) or (7), its minimum registered (paid-in) capital shall be 500 million yuan. iv. Risk control indicators. As prescribed by the Securities Law, the CSRC shall formulate provisions on the risk control indicators of a securities company, such as net capital, the ratio between net capital and liabilities, the ratio between net capital and net assets, the ratio between net capital and proprietary trading, underwriting and asset management, the ratio between liabilities and net assets, as well as the ratio between current assets and current liabilities. v. Internal control. A securities company shall establish an internal control system, and build up effective Chinese walls so as to prevent any conflict of interest between the company and its clients or between different clients. It shall segregate its securities operations on brokerage, underwriting, proprietary trading and asset management. vi. Funds of the clients. The clients trading settlement funds of a securities company shall be deposited in a commercial bank and managed through separate accounts under the clients names. A securities company shall by no means incorporate any settlement funds or securities of its clients into its own assets. Meanwhile, any entity or individual is prohibited from misusing the funds or securities of its/his clients in any form. Where a securities company is under bankruptcy or liquidation procedures, the settlement funds or securities of its client shall not be defined as its insolvent assets or liquidation assets. Unless for paying the liabilities of its clients or prescribed by laws, the funds or securities of its clients shall not be sealed up, frozen, deducted or enforced compulsorily. A securities company shall not provide any financing or guaranty for its shareholders or any related person. The CSRC started in the second half of 2004 a campaign to consolidate all securities companies for compliant operations. The campaign is estimated to last for around 2 years and its major tasks include: conducting an in-depth evaluation of corporate

27 risks and structural reforms, tightening supervision over senior management and shareholders, pressing ahead differentiated regulation over securities firms and optimizing the industrial structure. These efforts are aimed to cultivate more competitive and innovative securities companies in China and have proved to bear fruits following over two years endeavors. Financial conditions of many securities companies have been improved with more reliable financial reports and statements. The past leftover risks are primarily disposed and an effective risk control system has been put in place for compliant operations of securities firms. The campaign is anticipated to conclude in the second half of Securities trading service institutions Securities trading service institutions refer to the entities that provide services to issuers and investors, etc. They can be divided into different groups based on the type of services they provide, such as securities depository and clearing house, investment advisers, credit rating agencies, financial advisory companies, accounting firms, asset appraisal agencies and law firms. Any of the above institutions except law firms shall be licensed by the CSRC for securities-related businesses. As of the end of 2006, there were 105 securities investment advisers, 70 accounting firms engaging in securities-related businesses and 101 assets evaluation companies. a) Securities depository and clearing house The establishment of a securities depository and clearing institution is also subject to the approval of the CSRC. In March 2001, China Securities Depository and Clearing Corporation Ltd. (CSDCC), the only institution of its kind in China, was established. Starting from 1 October 2001, the CSDCC takes charge of all the depository and clearing of listed securities, which marked the establishment of a unified securities depository and clearing system subject to the CSRC s supervision. The General Manager, who reports to the Board of Directors, is responsible for the corporate operations. Headquartered in Beijing, the CSDCC has two subsidiaries, respectively in Shanghai and Shenzhen 18. In addition, the CSDCC is responsible for the depository and clearing of other exchange-listed instruments as well as the open-ended funds. Its business scope covers the opening and managing of securities accounts and settlement fund accounts, securities registration and transfer, securities depository, securities/payment clearing and delivery, acting as the agent for securities 18 These two subsidiaries were restructured respectively from Shanghai Depository and Clearing Corporation and Shenzhen Depository and Clearing Corporation

28 interests distribution, internet information services, and any other businesses approved by the CSRC. At present, the settlement is T+1 for A shares, and T+3 for B shares. b) Other securities trading service institutions Where an investment consulting institution, financial advisor, credit rating agency, asset appraisal institution, or accounting firm engages in any securities trading service, it shall be licensed by the CSRC and other competent authorities. Such a kind of institution is subject to ex ante licensing, ongoing supervision and afterwards sanctions. Although a law firm does not have to obtain a license from the CSRC for securities services, it is still subject to the CSRC s ongoing supervision and sanctions. The employees of an investment consulting institution, financial advisory institution or credit rating agency who engage in securities trading services shall have the securities expertise as well as related work experiences for more than 2 years. An investment consulting institution as well as its practitioners shall not have any of the following acts: Engaging in any securities investment on behalf of its entrusting party; Signing any agreement with any entrusting party on sharing the gains or bearing the loss of securities investments; Purchasing or selling any stock of a listed company, for which the consulting institution provides services; Providing or disseminating any false or misleading information to investors through media or by any other means; or Other act as prohibited by any law or regulation

29 V. Investors As of the end of 2006, a total of million securities investment accounts (including A shares and B shares) had been opened. Since its inception, China s securities market has been dominated by individual investors. In recent years, the CSRC has made vigorous efforts to nurture the growth of institutional investors. 1. Institutional Investors Developing and nurturing institutional investors is of crucial significance to the long-term developments of Chinese capital market. Firstly, a strong team of institutional investors is needed in order to optimize market functions. An increasing number of top enterprises will get listed in order to enhance the depth and magnitude of Chinese capital market. Meanwhile, institutional investors are more sophisticated with professional skills and able to find investment opportunities. They are indispensable players in wealth management. Secondly, institutional investors are needed for the integrity of market mechanisms. A significant amount of institutional investors can play leading roles in facilitating market functions of price discovery and external control. Thirdly, institutional investors are also needed for market innovations. Mature markets show that institutional investors are usually the leading initiators and promoters for innovations on products, transaction modes and trading systems. Furthermore, institutional investors are needed for market opening-up to the outside world. The growth of institutional investors can increase long-term supply of funds into the market and help set up mature investment concepts, enhancing Chinese capital market s capacities in combating risks. i. Securities investment funds overview. In 1998, the first five contractual closed-ended funds were launched, marking the birth of China s securities investment fund industry. In 2001, the first contractual open-ended fund was rolled out. After eight years of development, the fund industry has achieved remarkable progresses with a growing market visibility. As of the end of 2006, there were 53 closed-ended and 254 open-ended securities investment funds under the management of 58 (including 24 joint ventures) fund management companies (see Figure 2-5). Statistics show that the total net assets of these funds (RMB billion) and market value of securities they held accounted for 34% and 22% respectively of the total tradable share market capitalization in China. categories of funds. A diversified pool of funds was put forward over the past

30 few years, covering most fund products available in developed markets. At present, besides equity funds, there are bond funds, index funds, monetary market funds, umbrella funds, principal guaranteed funds, exchange traded funds and listed open-ended funds. division of regulatory responsibilities. The CSRC and self-regulatory organizations jointly supervise the securities investment fund industry. The Fund Supervision Department of the CSRC shoulders the major responsibilities on rules making, policy studies, review and approval of administrative license items, supervision of fund managers, custodian, fund sale agents, etc. A local regulatory bureau is responsible for daily supervision of fund managers within its jurisdiction with the regulatory tasks on corporate governance, internal control, senior management, fund sales, information disclosure, etc. Stock exchanges are supervising the trading activities and information disclosure of listed funds at the forefront. The Securities Association of China is empowered to self-regulate fund managers, sales agents, custodians and licensed professionals in the fund industry. Some relevant regulatory requirements are as follows: fund manager and custodian. Fund managers shall be assumed by fund management companies while custodians assumed by qualified commercial banks. A fund manager is required to be licensed by the CSRC, while a custodian needs to be jointly licensed by the CSRC and China Banking Regulatory Commission. A fund custodian and a manager cannot be the same party or invest on each other or cross hold shares. According to the Article 13 of Securities Investment Fund Law, the following conditions shall be met in order to establish a fund management company: having a registered capital of no less than RMB 100 million yuan; principal shareholders demonstrating a good track record and public reputation in the securities business, securities investment consultation, trust assets management or other financial assets management, committing no violation of law within the preceding 3 years, and having a registered capital of no less than RMB 300 million yuan; and the number of licensed fund professionals meeting the statutory requirement. placement of fund. A fund manager should, before its fund placement, submit its application and relevant documents to the CSRC. The fund placement shall start within 6 months from the date of receiving the ratification. fund operation. In managing its properties, a fund manager shall apply portfolio investments on listed stocks, bonds and other instruments permitted

31 by the CSRC. According to the Article 59 of Securities Investment Fund Law, fund properties should not be used in the following investments or activities: Underwriting of securities; Providing loans or guarantees to others; Engaging in investment with unlimited liability; Trading other fund units, unless otherwise approved by the State Council; Making capital contribution to the fund manager and custodian, or trading the stocks or bonds issued by the aforesaid manager and custodian; Trading the securities issued or underwritten by the shareholders controlling the fund manager or custodian, or by the companies with other significant interests with the aforesaid manager or custodian; Insider dealing, market manipulation or other wrongdoings; and Other activities prohibited by the CSRC. Figure 2-5 Summary of Investment Funds Issuance ( ) 300 Number closed-end fund open-end fund Source: the CSRC

32 Figure 2-6 Net Assets Value & Ratio in Tradable Market Capitalization ( ) % RMB 100 mil fund net assets fund net assets/mkt. cap.of tradable shares Source: the CSRC ii. Qualified Foreign Institutional Investors (QFII) The pilot scheme of Qualified Foreign Institutional Investors (QFII) was launched in December Based the approved investment quota, a QFII can invest on such financial instruments as A shares, treasuries, convertible bonds and corporate bonds listed in China's stock exchanges as well as other financial instruments approved by the CSRC. In order to become a QFII, an applicant should meet the following criteria: The applicant should be in a sound financial and credit status, meeting the requirements set by the CSRC on assets size and other indicators 19 ; and its risk control indicators should meet the requirements under its home jurisdiction; Its employees should meet the professional qualification requirements in its 19 The criteria of assets scale and other factors are: (1)for fund management institutions: having operated fund business for over 5 years with the most recent accounting year managing assets of no less than US$5 billion; (2)for insurance companies: having operated insurance business for over 5 years and managing securities assets of no less than US$5 billion in the most recent accounting year; (3) for securities companies: having operated securities business for over 30 years with paid-in capital of no less than US$1 billion and managing securities assets of no less than US$10 billion in the most recent accounting year; (4) for commercial banks: ranking among the top 100 of the world in the total assets for the most recent accounting year and managing securities assets of no less than US$10 billion; (5) for other institutional investors( pensions, charities, trusts, government investment companies), having operated for over 5 years with the most recent accounting year managing or holding securities assets of no less than US$5 billion

33 home jurisdiction; With a sound management and internal control system, the applicant should have a good track record without being imposed any substantial penalties by its home regulators over the last three years prior to application; Its home jurisdiction should have a sound legal and regulatory regime, and its securities regulator has signed Memorandum of Understanding with the CSRC and maintained an efficient co-operative regulatory relationship. As of the end of 2006, 52 overseas financial institutions had been licensed as QFIIs with a total investment quota of USD 9.05 billion, and 12 banks (including 5 overseas banks) were licensed as the QFIIs custodians. The securities assets of the QFIIs amounted to RMB billion yuan, accounting for 89% of their investment quota. Of their investment portfolios, RMB 97.1 billion yuan (86.8%) was invested in A shares, RMB 10 billion(9%) in funds, RMB 2 billion (1.8%) in convertible bonds and RMB 2.7 billion (2.4%) in Treasury bonds. iii. Other major institutional investors Besides securities investment funds and QFIIs, there are other institutional investors such as National Social Security Fund, insurance companies, corporate annuity funds and securities firms authorized for proprietary trading and assets management business, etc. a) National Social Security Fund The National Social Security Fund ( NSSF ) is an important institutional investor in China. According to the Provisional Measures on the Administration of National Social Security Fund, the National Council for Social Security Fund ( NCSSF ) in charge of the NSSF entrusts fund management companies to invest up to 40% of total assets in funds and stocks. b) Insurance companies Insurance companies are another important group of institutional investors in China. Insurance assets may be invested in capital market by two means: a) directly purchasing stocks up to 5% of total insurance assets; and b) buying securities investment funds up to 15% of total insurance assets. c) Corporate annuity funds Corporate annuity funds are about to become key players in the unfolding social security reform and development of institutional investors. According to the Provisional Measures on the Administration of Corporate Annuity Funds, these funds may invest up to 30% of total assets in the capital market

34 2. Securities Investor Protection Fund The Securities Investor Protection Fund (SIPF) was launched with a paid-in capital of RMB 6.3 billion in the second half of 2005 in order to protect the interests of securities investors against the losses from failing securities companies. Meanwhile, China Securities Investor Protection Fund Corporation Limited (SIPFC) was established to initiate, manage and develop the SIPF. The board of SIPFC consists of nine directors and the Chairman is recommended by the CSRC subject to the approval of State Council. The SIPF revenues primarily come from five sources: (1) 20% of the transaction fees submitted by Shanghai and Shenzhen Stock Exchanges when their risk reserves reach the stipulated upper limits; (2) 0.5% to 5% of operating revenues of securities companies; (3)the interest income from the locked funds subscribing for stocks or convertible bonds; (4) proceeds from the compensation of liable parties and the liquidation of securities companies; (5) donations of domestic and foreign institutions, organizations and individuals as well as other legitimate incomes. In case that the SIPF is used to dispose of risks in securities companies, the CSRC will work out risk disposal plans based on the nature of the risk, then the SIPFC shall formulate the implementation plan and execute it accordingly upon the approval of the State Council. After compensating the creditors of securities companies, the SIPFC obtains corresponding claims and the right to participate in liquidation of securities companies. The SIPF can only be invested on bank deposits, treasury bonds, central bank bonds (including central bank notes), financial bonds issued by central financial institutions and other means approved by the State Council

35 VI.Securities Self-Regulatory Organizations 1. Securities Association of China The Securities Association of China (SAC), established on 28 August 1991, is a non-profit self-regulatory organization with a legal person status subject to the guidance, supervision and administration of the CSRC and the Ministry of Civil Affairs. The highest authority of the SAC is its general assembly of members, and the board of governors is its executive body. As of the end of 2006, the SAC had 299 members, including 112 securities companies, 48 securities investment fund management companies, 3 financial assets management companies, and 92 securities investment consulting agencies in addition to 44 special members. The SAC shall perform the following functions: to educate its members and ensure the enforcement of laws and regulations governing securities to safeguard the legitimate rights and interests of members and report to the CSRC about suggestions and requests of members; to collect and process securities information in order to service members; to formulate rules governing its members, organize professional trainings and facilitate exchange of ideas among members; to mediate in the event of disputes between members or between members and their clients; to organize researches and surveys on the development and operation of securities industry; to supervise and inspect members professional conduct and impose disciplinary sanctions on any member that violates articles of association and self-regulatory rules; to promote international cooperation and exchanges in the securities industry; to undertake some responsibilities empowered by the CSRC: i) to facilitate the industry innovations and compliance, and organize the selection of innovation-type securities companies; ii) to mange the professional qualification system, and organize the qualification exams for securities professionals; iii) to keep a record of sponsors in underwriting business and the ex ante filing of membership-based securities investment consulting business ; iv) to supervise members information disclosure; v) to promote the standardization, communication and training in the field of securities

36 information technology; vi) to supervise and manage the Share Transfer System. 2. Stock Exchanges The Securities Law and Administration Measures on Stock Exchanges define a stock exchange as a self-regulatory legal person entity that provides the site and facilities for centralized securities trading and supervises the trading activities. At present, there are two stock exchanges in China, both Shanghai and Shenzhen Stock Exchanges are under the supervision of the CSRC. Each stock exchange has a general assembly of members and board of governors. The former is the highest authority while the board of governors is the executive body with Chairman and Vice Chairman nominated by the CSRC subject to election by the board. Besides, the president of each exchange is appointed by the CSRC. The major functions of a stock exchange include: providing the site and facilities for securities trading; formulating business rules; accepting listing applications and arranging listing issues; organizing and supervising the activities of securities trading; supervising the conduct of the members and listed companies; managing and disclosing market information; and other functions permitted by the CSRC. According to the Measures on the Administration of Stock Exchanges, a stock exchange shall monitor securities trading activities as follows: formulating detailed trading rules; publishing the real-time quotations and daily charts; compiling and circulating transaction data in a timely manner; ensuring investors an equal opportunity to trade and an equal access to market trading information; suspending or resuming the trading of listed securities; restricting or prohibiting the trading of specific securities investors; dealing with any violation of the business rules immediately; establishing a computer system capable of market supervision and real-time monitoring; and setting up a specific unit for market surveillance. According to the Measures, a stock exchange shall discipline its members as

37 follows: formulating specific rules governing its members; exercising stringent administration over the trading seats of members; supervising its members proprietary business (such as monitoring its members to use designated stock accounts and fund accounts with the help of technical means; requesting members to report monthly securities inventory before the 5th of the following month; adopting specific risk control measures over proprietary trading, etc.); supervising its members brokerage business (such as drafting the format of a brokerage agreement between a member and its clients and verifying its contents; providing for its members the procedures and responsibilities in accepting a client s orders and selectively inspecting its members compliance periodically; requesting its members to report their monthly brokerage business and clients' complaints before the 5 th of the following month, etc); selectively or extensively inspecting its members' financial conditions, internal risk control system and compliance with the exchange rules, and reporting the results to the CSRC; and imposing sanctions against the violating members. According to the Measures, a stock exchange shall monitor companies listed at its marketplace as below: formulating specific listing rules for different types of securities; signing listing agreements with listed companies clarifying respective rights and obligations; supervising the listing sponsors who ensure the listed companies to meet all listing requirements and guide them to fulfill their post-listing reporting obligations; reviewing the rights issue statement, listing announcement and other public documents, and ensuring the listed companies to publish the above documents in a timely manner; urging the listed companies to publish their annual reports and interim reports pursuant to the timeframe and the uniform format set by the CSRC, and keeping on monitoring after their disclosures; examining and verifying ad hoc reports submitted by the listed companies; suspending the trading of the shares of a listed company under certain circumstances (e.g. i. abnormal fluctuations occur in the share trading of the said company; ii. one or more investors offer to acquire the shares of the said company; iii. the listed company itself requests for the suspension pursuant to its listing agreement; iv. when a stock exchange deems necessary, etc.);

38 keeping a record of the shareholding structures of listed companies, compiling accurate statistics on the changes of shareholdings and overseeing the changes; punishing a listed company s failure to fulfill the information disclosure obligation, and if necessary, referring the listed company to the CSRC with proposed penalties. i.shanghai Stock Exchange (SHSE) The Shanghai Stock Exchange (SHSE) was founded on November 26, As of December 2006, a total of 842 companies with 886 equities were listed at the SHSE; and the total market capitalization amounted to RMB 7,161 billion. In terms of membership, the SHSE had 151 members, including 138 domestic securities firms, 13 trust and investment companies and 3 overseas special members. In addition, special B-share trading seats had been granted to 46 overseas securities companies. The SHSE has 16 departments in charge of office administration, trading management, listed companies, market surveillance, member supervision, bonds & funds, legal affairs, IT, research, etc. and two subsidiaries 20. The SHSE is running an advanced trading system capable of handling 16,000 transactions per second. Please refer to Figure 2-7 for Shanghai Composite Index movements. Figure 2-7 Shanghai Composite Index( ) Price CNY Source:Reuters Year 20 Securities Telecommunication Co., Ltd. and SSE InfoNet Co., Ltd

39 ii.shenzhen Stock Exchange (SZSE) Shenzhen Stock Exchange (SZSE) was established on December 1, 1990 as a non-profit membership institution. On May 27, 2004, the Small and Medium Enterprises (SME) Segment was launched at the SZSE, which observes the same IPO criteria as other segments of the main board. The SME Segment provides a direct financing platform for hi-tech or rapidly growing small and medium enterprises with competitive core businesses. As of the end of 2006, a total of 579 companies with 621 equities were listed in the SZSE, including 102 companies listed in SME Segment; and the total market capitalization reached RMB 1,779.2 billion. Among its 176members, there were 141 domestic securities firms or equivalent, 32 domestic companies concurrently providing certain securities services and 3 overseas special members. Additionally, 19 overseas securities companies had special B-share trading seats at the SZSE. The SZSE also has 16 departments in charge of market surveillance, member supervision, fund & bond and so on as well as 5 subsidiaries 21. The daily capacity of its trading system stands at 20 million trades with a double backup system. A comprehensive and highly computerized forefront surveillance system has been put in place in order to detect, terminate and punish wrongdoings in a timely manner. The SZSE has also set up an extensive information network on market data and listed company news, which ensures the timely dissemination of market information. Please refer to Figure 2-8 for Shenzhen Component Index movements. Figure 2-8 Shenzhen Component Index( ) Price CNY Year 21 Five subsidiaries include Research Center, Securities Satellite Co., Ltd., Securities Information Co., Ltd., etc. For more information, please refer to the website (

40 PART III. FUTURES MARKETS I. Market Overview China s commodity futures market started almost simultaneously with the stock market. In October 1990, as the first commodity futures market in China, Zhengzhou Grain Wholesale Market introduced its first futures contract. However, due to the lack of a sound legal and regulatory framework, the following years saw disorders and other problems in the market. From 1994, the CSRC was mandated to consolidate the whole market. Today, the market has 3 commodity exchanges (Shanghai Futures Exchange, Zhengzhou Commodity Exchange, and Dalian Commodity Exchange) and 183 brokerage firms, compared with 50 commodity exchanges and 1,000 brokerage firms at the peak time in The traded products have been downsized from 35 to 13 products. On 8 September 2006 China Financial Futures Exchange (CFFE), the first of its kind, was founded in Shanghai jointly by SHSE, SZSE, Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange. Its establishment is of crucial significance in deepening Chinese capital market reform, improving market structures and exercising market functions. In terms of financial derivative instruments, currently only warrants are available at Chinese securities exchanges. The CFFE is preparing to roll out stock index futures and options, and studying/designing other derivatives like treasury and FOREX futures and options With regard to the performance of commodity futures market in recent years, a recovering growth in the turnover and trading volume is recorded since In 2006, the total trading volume and turnover reached 449 million lots (a year-on-year increase of 39.22%) and RMB 21 trillion (a decrease of 56.23%). Please refer to Figure 3-1 for details. Both Zhengzhou Commodity Exchange (ZCE) and Dalian Commodity Exchange (DCE) trade contracts on agricultural products, such as wheat, cotton, corn, soybean, mung bean, bean oil, sugar, etc, while Shanghai Futures Exchange (SHFE) provides futures contracts on other commodities such as copper, aluminum, rubber, fuel oil, etc. At the end of 2006, the PTA futures contract was traded. Figure 3-2 shows the trading statistics of the futures products in

41 Figure 3-1 Trading Volume and Turnover of Futures( ) RMB 100 mil RMB 100 Million Source:the CSRC lots Figure 3-2 Trading Summary of Futures Market in 2006 Annual turnover Annual trading (BASED ON THE NATURE OF FUTURES PRODUCTS) volume 0 Source: the CSRC Figure 3-2 Trading Summary of Futures Market in 2006 ( based on the nature of futures products) % % 74.1% 25.9% 0 turnover(rmb 100 mil) trading volume(10,000 lots) agricultural products industrial products Source: the CSRC

42 II. Futures Brokerage Companies Futures brokerage companies are the leading intermediaries in the futures market. By the end of 2006, 183 futures brokerage companies were operating in China. The CSRC adopts a geographically-based supervisory system in supervising futures brokerage companies. The Futures Supervision Department of the CSRC shoulders the major responsibilities including rules making, policy studies, regulatory coordination, and supervising regional bureaus and stock exchanges, etc. A local regulatory bureau is responsible for daily supervision of the futures brokers and their senior management within its jurisdiction, including their corporate governance, internal control, financial status and compliance; meanwhile it also takes charge of risk detections and disposals. The regulatory requirements concerning a futures brokerage company s establishment, business scope and risk control are as follows: 1. Establishment. According to the Provisional Regulations on the Administration of Futures Trading and the Measures on the Administration of Futures Brokerage Companies, the establishment of a futures broker is subject to the approval by the CSRC. Besides the relevant provisions in the Company Law, an applicant shall also meet the following conditions: a registered capital of no less than RMB 30 million; senior executives and main employees are qualified professionals in futures business; an immobile business venue and sufficient trading facilities; a well-established management system; other conditions as stipulated by the CSRC. Futures brokerage companies can, based on their business needs, apply to the CSRC to establish their branches/subsidiaries. 2. Business scope. A futures brokerage company may engage in the following futures businesses: futures brokerage business; futures consultation and training; other businesses as approved by the CSRC. Futures brokers are prohibited to openly or disguisedly engage in futures proprietary trading. 3. Risk control. A futures broker shall set up a specific department or positions for risk control which check its own financial condition, business operation and compliance as well as drafts risk control reports. It shall also recruit qualified accounting firms to audit its financial and operating statements annually

43 III.Futures Self-regulatory Organizations 1. China Futures Association China Futures Association (CFA), established on 29 December 2000, is a self-regulatory organization for the futures industry. It is a non-profit legal person entity subject to the guidance, supervision and administration of the CSRC and the Ministry of Civil Affairs. The highest authority of the CFA rests with its general assembly of members and the board of governors is its standing executive body. The CFA is led by the Secretary General with important decisions made by Working Meetings of Heads. As of the end of 2006, the CFA consists of 183 institutional members (mainly futures brokerage companies), 3 special members (futures exchanges) and a number of licensed individual members. The CFA shall perform the following functions: to formulate self-regulatory rules, industry criteria and professional norms for the futures industry and supervise their implementation, to educate its members and ensure the enforcement of laws and regulations governing futures; to protect the legitimate rights and interests of members, assist members in their operations and report to the CSRC about suggestions and requests of members; to mediate in the event of disputes between members or between members and their clients and deal with the complaints against its members; to arrange for the vocational training, qualification exam and issuance of certificate for professionals in the futures industry to improve their skills and ethics; to actively carry out surveys and researches on the futures market, organize its members to exchange experiences in operation and management, and report to the CSRC about members suggestions and requests of developing the futures market; to promote the knowledge and public awareness of the futures market, and educate the investors of basic knowledge on futures and risk controls; to supervise and inspect members business conducts, reward outstanding members/individuals, and impose disciplinary sanctions against any member that violates the CFA articles of association or self-regulatory rules; to collect and process information from futures markets at home and abroad for consultation services to members, and publish futures-related publications; to promote international communications and cooperation of the futures industry;

44 other responsibilities determined by the general assembly of members or empowered by the CSRC. 2. Futures Exchanges According to the Provisional Regulations on the Administration of Futures Trading and the Measures on the Administration of Futures Exchanges, futures exchanges are self-regulatory legal entities performing functions pursuant to their articles of association. All the three futures exchanges SHFE, ZCE and DCE are under the CSRC s supervision. In a futures exchange, the general assembly of members is the highest authority, and the board of governors is the executive body whose Chairman and Vice Chairman are nominated by the CSRC and elected by the board. The CSRC is entitled to appoint and discharge the general manager of an exchange. The future exchanges shall fulfill the following functions: providing the venues, facilities and services for futures transactions; designing futures contracts and arranging the listing of futures contracts; organizing and supervising futures transactions, settlement and delivery; ensuring the honoring of futures contracts; and establishing and running the risk management system (e.g. regarding margins, daily debt-free netting, price fluctuation limit, position limit, large positions reporting, risk reserves, etc). According to the Measures on the Administration of Futures Exchanges, the supervisions and administrations of a futures exchange over its members include: Formulating the administration rules of its members; Formulating the administration rules on trading seats and prohibiting members to transfer the seats entirely or partly in the form of lease or subcontract; making selective or extensive inspections over the members' compliance with the exchange business rules and report the results to the CSRC. All members are compelled to cooperate. According to the above mentioned Measures, the supervisions and administrations of a futures exchange over futures trading include: Implementing the systems of margins, daily debt-free netting, investor trading coding, hedging positions review and speculative positions limit, arge positions reporting, price fluctuation limit, etc; Promulgating market information on real-time quotations, the ranking in terms of positions and trading volume, etc. in an appropriate manner; Compiling and publishing relevant trading statements in a timely manner;

45 Taking the following provisional measures to prevent the ongoing violations by a member or a client: (1) to limit the injection of margins; (2) to limit the withdrawal of margins; (3) to limit the opening of new positions; (4) to raise the margins ratio; (5) to close positions before a designated date; (6) to immediately close positions. When the exchanges take the foregoing measures in (4) (5) and (6), they should report to the CSRC immediately. i. Shanghai Futures Exchange (SHFE) Shanghai Futures Exchange (SHFE), originated from the merging of Shanghai Metal Exchange, Shanghai Cereal and Oils Exchange and Shanghai Commodity Exchange, started its operation in December As of December 2006, the SHFE had a total of 209 members, of which 172 were brokerage firms (82%) and 34 were proprietary traders (15%). It had 200 remote trading terminals nationwide. At present, copper, aluminum, rubber and fuel oil contracts are traded in the SHFE. In 2006, the trading volume hit million lots, and the turnover registered RMB trillion, 60.03% of the national total. There are 17 departments under the SHFE in charge of office administration, market surveillance, trading, settlement, delivery, legal affairs, information, enforcement, research, financial futures and so on. ii. Dalian Commodity Exchange (DCE) Dalian Commodity Exchange (DCE) was established on February 28, As of December 2006, it had a total of 194 members, among which 92.3% are futures brokerages companies. The DCE had 222,360 registered investors, including 68,132 new investors in The corn, soybean, bean meal and bean oil contracts are traded at the DCE. Among them, the soybean is the most actively traded product and its price in the DCE has become an important indicator for China s soybean production and sales. In 2006, the trading volume at the DCE amounted to 241 million lots (53.55% of the national total) with turnover at RMB 5.22 trillion (25% of the national total). There are 14 departments under the DCE, including departments on trading, delivery, settlement, market surveillance, technology, and Beijing office, etc. iii. Zhengzhou Commodity Exchange (ZCE) Zhengzhou Commodity Exchange (ZCE) was established in October By the end of 2006, it had 226 members, including 180 futures brokers and 46 proprietary traders

46 The traded products on the ZCE include wheat, cotton, mung bean, sugar and PTA, among which wheat and cotton are the most actively traded. In 2006, the ZCE registered a trading volume of million lots (a 62.63% year-on-year increase) with the turnover at RMB 3.18 trillion (a year-on-year increase of 46.99%). The ZCE has 12 departments respectively in charge of trading, delivery, settlement, options, market development, research development, etc

47 PART IV. LEGAL FRAMEWORK The establishment of a sound regulatory framework has been the cornerstone as well as the basis for China s capital market development. On 27 October 2005, Chinese top legislator, the National People s Congress, passed the revised Company Law and Securities Law which came into effect from 1 January The revision, based on the accumulative past experiences and in-depth studies, made a number of significant changes to the provisions and laid out a series of wide-ranging and far-sighted mechanisms, which marked a new era for China s capital market legal framework. By the end of 2006, such a legal framework had taken shape focusing on three pieces of legislation: Company Law,Securities Law, and Securities Investment Fund Law. They were supplemented by 13 regulations and administrative rules such as Provisional Regulations on Public Offering & Trading and Provisional Regulations on Futures Trading as well as over 350 departmental rules, guidelines and codes. Within this framework, there were regulations that govern: securities offering, listing, and disclosure; securities and futures trading; corporate governance, mergers and acquisitions of listed companies; securities and futures intermediaries; supervision of securities investment funds; securities and futures markets supervision & legal liabilities. I. Securities Offering, Listing, and Disclosure The Articles 2 & 3 of Securities Law govern public offering and listing of shares as well as information disclosure, including: the definition of public offering, the requirements on IPOs and issuance of corporate bonds, the requirements on securities underwriting, pricing and listing (including suspension and delisting), information disclosure requirements on issuers and listed companies. The Chapter 5 of Company Law also sets forth a number of principles on the issuance of a joint stock company s shares. Meanwhile, the Articles 238 of Securities Law authorizes the State Council to issue rules regarding a Chinese enterprise directly or indirectly issuing and listing securities overseas for trading. Other rules and regulations in this area include: Provisional Regulations on Public Offering and Trading; State Council s Special Rules on Overseas Offering and Listing of Joint Stock Companies; Measures on the Administration of IPO Issuance and Listing;

48 Measures on the Administration of Securities Offerings and Underwritings Measures on the Administration of Securities Offerings by Listed Companies Interim Measures on the Sponsor System for Securities Public Offerings; Notice on Overseas Listing Applications Guidelines on Approval and Supervision of Chinese Companies Listing on Hong Kong GEM Standards for Content and Format of Information Disclosure of Public Companies. II. Securities and Futures Trading The Articles 3 of Securities Law sets forth the principles for securities trading, which fall into two categories: general regulations on trading, including trading venue, modes, commissions, eligible participants, etc; regulations on prohibited behaviors such as insider dealing, market manipulation, making up and circulating false information, etc. Other relevant rules and regulations include the Measures on the Administration of Stock Exchanges, Measures on the Administration of Futures Exchanges, Measures on the Administration of Securities Registration and Settlement, Measures on the Administration of Securities Settlement Risk Fund and Notice on Issues of Tightening Control over Members Settlement Risks. III. Corporate Governance, Mergers and Acquisitions of Listed Companies The Article 4 of Securities Law sets forth the M & A methods and information disclosure requirements, the content of M & A report, post-acquisition shares arrangements, etc. Besides, the Chapter 4 of Company Law also provides general principles on organizational structure, independent directors, board secretary and related party transaction of listed companies. There are a number of other rules and regulations governing this area, such as the Guidelines for Establishing Independent Directors of Listed Companies, Code of Corporate Governance for Listed Companies, Measures on the Merger and Acquisition of Listed Companies, Rules on the Merger and Acquisition of Domestic Companies by Overseas Investors, Notice on Some Issues about Transfer of State-Owned Shares and Legal-person Shares of Listed Companies to Foreign Entities, Rules on Strengthening Protection of Private Shareholders' Rights and Interests, Provisions on Article of Association for Overseas Listed Companies, Rules

49 on Shareholders Meeting of Listed Companies and Guidelines on Article of Association for Listed Companies. IV. Securities and Futures Intermediaries 1. Regarding Securities Companies The Article 6 of Securities Law sets forth principles for securities firms on their establishment criteria, business scope, capital requirements, risk control indicators, nomination of board directors, board supervisors and senior executives, internal control system, safekeeping of trading settlement funds, and penalties on wrongdoings. Other related rules and regulations include the Measures on the Administration of Securities Companies, Provisional Measures on Clients Asset Management by Securities Companies, Administration Measures on Qualification of Senior Management of Securities Companies, Administration Measures on Bidding for Risk Control in Securities Companies and Administration Measures on Clients Settlement Fund Management. 2. Regarding Futures Brokerage Houses The Provisional Regulations on Futures Trading enacted from 1 September 1999 governs the futures brokerage houses on their establishment criteria, approval procedure, business scope, liquidation, etc. There are also a number of other rules and regulations governing this area, such as the Administration Measures on Futures Brokerage Houses, Administration Measures on Senior Management of Futures Brokerage Houses, Code of Governance of Futures Brokerage Houses (provisional). They set forth details on the founding, modification and termination of futures brokerage houses, basic operation rules, appointment of senior executives, performance evaluation and incentive scheme, etc. 3. Regarding Other Service Providers The Article 7 of Securities Law lays out principles for other specialized services providers on their establishment criteria, liquidation, functions, operation, safekeeping of documents, and settlement. Besides, Administration Measures on Stock Exchanges also lays out details on the establishment, organizational structure and functions of securities registration and settlement institutions. The Article 8 of Securities Law sets forth the principles for investment advisors, financial advisors, credit rating agencies, assets evaluation institutions and accounting firms engaging in securities services. In addition, the Provisional Measures on Securities and Futures Investment Consultancy and corresponding implementation rules give details on how to govern securities and futures investment consultancy business

50 V. Supervision of Securities Investment Funds The Securities Investment Fund Law stipulates the provisions regarding fund managers, custodians, placement and trading of funds, subscription and redemption of funds, operations and information disclosure, modification and termination of contracts, liquidation of funds, rights and interests of fund holders and their ways of exercising, supervision and administration of funds, and legal liabilities, etc. Corresponding to the Securities Investment Fund Law, the CSRC in 2004 promulgated 7 Measures respectively regulating the information disclosure, operation and sales of securities investment funds, namely, Administration Measures on Information Disclosure of Securities Investment Funds, Administration Measures on Operation of Securities Investment Funds, Administration Measures on Sales of Securities Investment Funds, Administration Measures on Securities Investment Fund Companies, Administration Measures on Senior Management in Securities Investment Funds Industry, Administration Measures on Securities Investment Fund Custody and Administration Measures on Domestic Securities Investments of QFIIs. These regulations have helped to constitute the legal framework governing China s securities investment fund industry. VI. Securities and Futures Markets Supervision & Legal Liabilities The Securities Law sets forth specific provisions regarding stock exchanges, securities industry association and securities regulator. The CSRC is mandated to be the regulatory authority for China s securities and futures markets. The securities and futures exchanges are front-line regulators in addition to providing trading facilities; and the securities association and futures associations, as self-regulatory organizations, supervise and discipline securities companies and futures brokerage houses respectively. In December 2005, the CSRC published the Implementation Measures on Freezing and Sealing which sets forth details for the CSRC s enforcement powers and procedures in freezing and sealing the illegal funds, assets and important evidences. In June 2006, the CSRC promulgated Regulations on Securities Market Injunctions, which sets details on the applicable scopes, timeframe, reduction and lifting of market injunctions against the violators and these violators administrative rights. The Securities Law, Company Law, Securities Investment Fund Law and Criminal Law expressly lay out the civil, administrative and criminal liabilities of a party guilty of securities and futures offenses and crimes, including fraudulent practices, insider dealings and market manipulations. Meanwhile, the Supreme Court issued a number of legal explanations such as the Certain Rules on Dealing with Civil

51 Compensation Cases Related to False Statement and Rules on Dealing with Futures Dispute Cases, which sets rules on handling civil liability lawsuits in relation to capital market. In addition, the SROs including stock and futures exchanges, securities and futures associations, have established their own legal system governing their members and activities as a supplement to the capital market legal framework

52 PART V. CHINA SECURITIES REGULATORY COMMISSION I. Regulatory Regime and Organizational Structure In October 1992, the State Council Securities Committee and its executive arm the CSRC were established and mandated to regulate China s securities and futures markets. In 1998, the State Council Securities Committee terminated operations and its functions were transferred to the CSRC which becomes the sole regulator supervising nationwide securities and futures markets. The CSRC is now one of the 14 organizations directly under the State Council (see Figure 5-1). The top executive body of the CSRC is composed of one Chairman, five Vice-Chairmen, and three Assistant Chairmen. The Commission consists of 17 functional departments and 3 affiliate centers. Headquartered in Beijing, the CSRC has 36 regulatory bureaus throughout China s provinces, municipalities, autonomous regions and key cities, as well as 2 supervisory offices in Shanghai and Shenzhen (see Figure 5-2). At present, there are 2,131 staff in the CSRC with an average age of 35.5 years old, and 46.6% of the staff hold master degrees or above. II.Major Functions & Powers of the CSRC According to the Article 179 of the Securities Law, the CSRC is mandated to perform the following supervisory functions and duties: Formulating the relevant rules and regulations on the supervision and administration of the securities market and exercising the power of examination or verification; Carrying out the supervision and administration of the issuance, listing, trading, registration, custody and settlement of securities; Carrying out supervision and administration of the securities activities of the securities issuers, listed companies, stock exchanges, securities companies, securities registration and clearing houses, securities investment fund management companies and securities trading service providers; Formulating the standards for securities practice qualification and code of conduct and carrying out supervision and implementation; Carrying out supervision and examination of information disclosure regarding the issuance, listing and trading of securities; Offering guidance for and supervising the activities of the securities industry associations; Investigating into and punishing any violation of any law or administrative regulation on the supervision and administration of the securities market; and

53 Performing any other functions and duties as prescribed by any law or administrative regulation. The CSRC may establish a cooperative mechanism with the securities regulators of other jurisdictions for cross-border supervision and administration. And according to the Article 180 of the Securities Law, where the CSRC performs its duties and functions, it has the power to take the following measures: Carrying an on-the-spot examination to a securities issuer, listed company, securities company, securities investment fund management company, securities trading service provider, stock exchange or securities registration and clearing institution; Making investigation and collecting evidence in a place where any suspected irregularity has happened; Consulting the parties concerned or any entity or individual relating to a case under investigation and requiring the relevant entity or person to give explanations on the matters relating to a case under investigation; Referring to and photocopying such materials as the registration of property right and the communication records relating to the case under investigation; Referring to and photocopying the securities trading records, transfer registration records, financial statements as well as any other relevant documents and materials of any entity or individual relating to a case under investigation; sealing up any document or material that may be transferred, concealed or damaged; Consulting the capital account, securities account or bank account of any relevant party concerned in or any entity or individual relating to a case under investigation; in the case of any evidence certifying that any property as involved in a case, such as illegal proceeds or securities, has been or may be transferred or concealed; or where any important evidence has been or may be concealed, forged or damaged, freezing or sealing up the foregoing properties or evidence upon the approval of the principal of the securities regulatory authority under the State Council; When investigating into any major securities irregularity such as market manipulation or insider trading, upon the approval of the principal of the securities regulatory authority under the State Council, restricting the securities trading of the parties concerned in a case under investigation, whereby the restriction term shall not exceed 15 trading days; under any complicated circumstance, the restriction term may be extended for another 15 trading day

54 Figure 5-1 Organizational Chart of the State Council State Council Special Institutions directly under the State Council (1) Organizations directly under the State Council (19) Ministries and Commissions under the State Council(28) Institutions directly under the State Council (14) Working Organs of the State Council (4) State-owned Assets Supervision and Administration Commission General Administration of Customs Minister of Foreign Affairs China Banking Regulatory Commission (CBRC) Overseas Chinese Affairs Office of the State Council State Administration of Taxation National Development and Reform Commission China Securities Regulatory Commission (CSRC) Hong Kong and Macao Affairs Office of the State Council State Administration for Industry and Commerce Minister of Finance China Insurance Regulatory Commission(CIRC) Legislative Affairs Office of the State Council Minister of Labour and Social Security National Council for Social Security Fund Research Office of the State Council Minister of Commerce People's Bank of China

55 Figure 5-2 Organizational Chart of the CSRC Chairman 5 Vice Chairmen 3 Assistant Chairmen Direct Affiliates Departments Regional Bureaus Public Offering Review Committee Administrative Sanction Committee Internal Service Center (Administration Center) Research Center Information Center 1. General Office 2. Public Offering Supervision 3. Non-listed Public Companies Supervision 4. Market Supervision 5. Intermediary Supervision 6. Risk Control Office of Securities Companies 7. Listed Company Supervision 8. Investment Funds Supervision 9. Futures Supervision 10. Enforcement Bureau I (Office of Chief Enforcement Officer) 11. Enforcement Bureau II 12. Legal Affairs (Office of General Counsel) 13. Accounting (Office of Chief Accountant) 14. International Cooperation 15. Personnel and Education 16. Office of Coordination Committee for Regional Bureaus 17. Bureau of Internal Compliance Beijing Tianjin Hebei Shanxi Inner Mongolia Liaoning Jilin Heilongjiang Dalian Shanghai Jiangsu Zhejiang Ningbo Shandong Anhui Henan Qingdao Hubei Hunan Jiangxi Guangdong Fujian Guangxi Xiamen Shenzhen Hainan Sichuan Chongqing Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang Shanghai Supervisory Office Shenzhen Supervisory Office

56 PART VI. OPENING UP & INTERNATIONAL COOPERATION I. Opening up to the Outside World Ever since the birth of China s capital market, great importance has been attached to its opening up to the outside world. For over a decade, a series of measures have been adopted in this regard in a gradual and steady approach. 1. Market Opening-up i. Overseas listing Since 1992, the B shares have been issued, subscribed and traded by international investors in foreign currencies at Chinese stock exchanges. Chinese enterprises are also allowed to go public at overseas markets starting from As of the end of 2006, 109 companies had issued a total of billion B shares, raising 5 billion US dollars. Meanwhile, a total of 143 domestic companies had issued H shares overseas, raising billion US dollars in total. 141 of them were listed on the Hong Kong Exchanges and Clearing Ltd. (of which 10 were dually-listed in Hong Kong and New York; 4 dually-listed in Hong Kong and London; 1 triply-listed in Hong Kong, New York and London; and 2 solely listed in Singapore); and 32 companies out of the 143 H share companies issued A shares as well. ii. Domestic listing of foreign-invested companies Starting from November 2001, foreign-invested companies registered in China can apply for stock issuance and listing in China. They are eligible for a national treatment provided that their business plans are consistent with the national industrial development guidelines for foreign investments 22. Up to date, a number of such companies 23 have been listed at Chinese stock exchanges. iii. Investing in Chinese A share market by foreign investors In December 2002, China launched the Qualified Foreign Institutional Investor (QFII) scheme, which opened up China s domestic A shares market to international investors. Given the non-convertibility of Chinese currency under the capital account at present, such a move is a transitional measure to attract foreign portfolio investments and goes beyond China s commitments upon WTO entry. As of the end of 2006, 52 overseas financial institutions had been licensed as the QFIIs with a total investment quota of 9.05 billion US dollars, and 12 banks (including 5 overseas banks) were licensed as the QFIIs custodians. 22 The guidelines are made by the Ministry of Commerce. 23 The exact number is not available as the shareholders are subject to changes

57 iv. Foreign strategic investors of domestically-listed companies Starting from November 2002, the state-owned shares and legal person shares can be transferred to international investors. Besides, starting from January 2006, international investors are also allowed to become medium to long-term strategic investors of listed companies that have concluded non-tradable share reform or post-reform newly listed companies. In such a case, foreign initial investment should be no less than 10% of the outstanding shares for a lockup period of 3 years. v. Overseas Futures Trading by Chinese Entities Transactions in overseas futures contracts by Chinese entities are allowed under a strict control. They have to be approved by both the State Council and the CSRC, and for the purposes of hedging only. To date, 31 such companies have been approved which have discretions in choosing qualified overseas futures exchanges and brokers for investments, however, the products they trade have to be approved by the Ministry of Commerce. 2. Opening up of Services Industry The WTO commitments on capital market upon China s accession are: (1) foreign securities institutions may engage directly (without Chinese intermediary) in B share business; (2) representative offices in China of foreign securities institutions may become Special Members of all Chinese stock exchanges; (3) foreign service suppliers are permitted to establish joint ventures with foreign investment up to 33 per cent to conduct domestic securities investment fund management business. Within three years after China's accession, foreign investment can be increased to 49 per cent; (4) within three years after accession, foreign securities institutions will be permitted to establish joint ventures, with foreign minority ownership not exceeding 1/3, to directly engage in underwriting A shares and in underwriting and trading of B and H shares as well as government and corporate debts, launching of funds. As of the end of 2006, Shanghai and Shenzhen Stock Exchanges had 3 overseas special members respectively. In addition, special B-share trading seats were respectively granted to 46 and 19 overseas securities companies by two Exchanges. 7 joint venture securities companies 24 and 24 joint venture fund management companies had been established. The latter were managing 108 funds (35% of all funds) with a total of billion units (37% of market share). In addition, mainland China has a special arrangement with the Hong Kong SAR and Macao SAR in the field of financial services, which allows wider opening-up of 24 Including 3 JV securities firms prior to China s WTO accession

58 Chinese capital market to these two regions. According to the Closer Economic Partnership Arrangement (CEPA): (1) since 1 January 2004, licensed professionals for securities and futures businesses from Hong Kong and Macao, in order to practice in mainland China, don t need to take professional exams; instead they only need to take exams on laws, rules and regulations; (2) from 1 January 2005, Hong Kong and Macao services providers meeting the CSRC s requirements are allowed to hold a stake in Chinese futures brokerage houses; (3) starting from 1 January 2006, highly compliant Chinese securities firms are allowed to set up subsidiaries in Hong Kong, and qualified Chinese futures brokerage houses are allowed for businesses in Hong Kong, including setting up subsidiaries. In March of 2006, the CSRC approved Green Futures Company, Zhejiang Yong an Futures Company, Guangfa Futures Company, China International Futures Co. Ltd (CIFCO), Jinrui Futures Company and Nanhua Futures Company to open branches in Hong Kong. The CIFCO became the first mainland future house to set up a subsidiary in Hong Kong. II. International Exchange and Cooperation The CSRC has always been attaching great importance to the exchange and cooperation with overseas counterparts and international organizations. Through joining international organizations, signing bilateral MOUs, exchange of visits, holding training programs, hosting or participating in international conferences, the CSRC has developed strong ties with overseas regulatory authorities. The CSRC joined the International Organization of Securities Commissions (IOSCO) as an ordinary member in 1995 and has been sitting in the IOSCO s Executive Committee since September 1998 for 8 consecutive terms ( ). At the 2006 IOSCO Annual Conference in Hong Kong, Mr. SHANG Fulin, the CSRC Chairman, was elected to be the Vice Chairman of the Executive Committee. Shanghai and Shenzhen Stock Exchanges joined the IOSCO as affiliate members in 1996 and later joined the World Federation of Exchanges. The three futures exchanges also joined a number of international bodies, such as Futures Industry Association, International Option Market Association, Futures and Options Association, etc. By active involvements in the above organizations, these organizations can introduce to the world Chinese market developments and draw on international regulatory expertise and operation experiences. As of December 2006, the CSRC had signed 32 MOUs with securities regulators from 36 jurisdictions (please refer to Table 6-1). The MOUs facilitate information exchange, cross-border assistance, and dialogue on policies and regulation. These MOUs also pave way for the overseas listing of Chinese enterprises, investing in China s securities market by qualified foreign institutional investors, and the establishment of

59 joint-venture securities companies and fund management companies. The stock and futures exchanges, industry associations and the clearing house also entered into MOUs with overseas counterparts concerning information exchanges, staff trainings and research cooperation. In summary, the MOUs establish an effective channel of communications that helps to improve mutual understandings and facilitate exchanges between Chinese and overseas counterparts. In June 2004, the CSRC established its think tank International Advisory Council ( IAC ) consisting of over ten international experts and scholars. The mission of the IAC is to collect the views and advice of international financial experts regarding the reform and growth of China s capital markets, and to keep the CSRC abreast of the latest issues and trends in the global financial markets. The IAC normally holds a meeting annually, and its first and second meetings were held in Beijing (September 2004),Shanghai (June 2005) and Shenzhen (May 2006) respectively

60 Table 6-1 List of MOUs Signed by the CSRC with Overseas Authorities (As of December 2006) Date Overseas Authorities MOU Titles 19 June 1993 Memorandum of Regulatory Cooperation Hong Kong Securities and Futures 4 July 1995 Commission Memorandum of Regulatory Cooperation Concerning Futures 28 Apr U.S. Securities and Exchange MOU Regarding Cooperation, Consultation and the Commission Provision of Technical Assistance 30 Nov Monetary Authority of Singapore MOU on Cooperation and Exchange of Information on Regulation of Securities and Futures Activities 23 May 1996 Australian Securities Commission MOU Regarding Securities and Futures Regulatory Cooperation 7 Oct MOU on Mutual Assistance and the Exchange of UK HM Treasury, Securities and Information Concerning Regulatory Cooperation in Investments Board Securities and Futures Matters 18 Mar Ministry of Finance, Japan Memorandum of Understanding 18 Apr Securities Commission of Malaysia MOU Regarding Securities and Futures Regulatory Cooperation 13 Nov Comissao de Valores Mobiliarios, Brazil Memorandum of Understanding Ukraine Securities and Stock Market 22 Dec MOU Regarding Securities Regulatory Cooperation 4 Mar State Commission Commission des opérations de bourse, France 18 May Commissariat aux Bourses, Luxemburg MOU Regarding Securities and Futures Regulatory Cooperation MOU Regarding Securities and Futures Regulatory Cooperation 8 Oct Bundesaufsichtsamt für den Wertpapierhandel, Germany MOU Regarding Securities Regulatory Cooperation 3 Nov Commissione Nazionale per le Societả e MOU Regarding Securities and Futures Regulatory la Borsa, Italy Cooperation 22 June 2000 Capital Market Authority of Egypt MOU Regarding Securities Regulatory Cooperation 19 June 2001 Financial Supervisory Commission, Arrangement Regarding Securities and Futures Korea Regulatory Cooperation 18 Jan.2002 U.S. Commodity Futures Trading Futures regulatory cooperation MOU Commission MOU Regarding Securities and Futures Regulatory 27 June 2002 Romania National Securities Commission Cooperation MOU Regarding Securities and Futures Regulatory 29 Oct Financial Services Board, South Africa Cooperation Netherlands Authority for the Financial 1 Nov MOU on the Exchange of Information Markets Belgium Banking and Finance MOU Regarding Securities and Futures Regulatory 26 Nov Commission Cooperation The Participating Members of Canadian MOU Regarding Securities and Futures Regulatory 21 Mar Securities Administrators Cooperation MOU Regarding Securities and Futures Regulatory 22 May Swiss Federal Banking Commission Cooperation Indonesian Capital Market Supervisory MOU In Relation to Mutual Assistance and 9 Dec Agency (BAPEPAM) Exchange of Information MOU Regarding Securities and Futures Regulatory 20 Feb New Zealand Securities Commission Cooperation

61 Commodity Futures Trading Regulatory 14 Oct MOU Regarding Futures Regulatory Cooperation Agency of Indonesia 26 Oct Comissao do Mercado de Valores MOU Regarding Securities and Futures Regulatory Mobiliarios of Portugal Cooperation 14 June 2005 Nigerian Securities and Exchange MOU Regarding Securities and Futures Regulatory Commission Cooperation 27 June 2005 State Securities Commission of Vietnam MOU Regarding Securities and Futures Regulatory Cooperation 15 Sep Securities & Exchange Board of India MOU Regarding Securities and Futures Regulatory Cooperation 20 Sep Comisión Nacional de Valores of MOU Regarding Securities and Futures Regulatory Argentina (CNV) Cooperation 20 Sep Jordan Securities Commission MOU Regarding Securities and Futures Regulatory Cooperation 26 Sep the Financial Supervisory Authority of MOU Regarding Securities and Futures Regulatory Norway (Kredittilsynet) Cooperation MOU Regarding Securities and Futures Regulatory 10 Nov Capital Markets Board of Turkey(SPK) Cooperation 21 Nov Forward Markets Commission of India MOU Regarding Commodity Futures Regulatory Cooperation 6 Dec Emirate Securities and Commodities MOU Regarding Securities and Futures Regulatory Authority Cooperation

62 Annex: Contact Information of Relevant Institutions China Securities Regulatory Commission Focus Place A, 19 Jin Rong Street, Xicheng District, Beijing , China Tel: Fax: Website: Shanghai Stock Exchange 528 Pudongnan Road, Pudong Shanghai, , China Tel: Fax: Website: Securities Association of China B Focus Place, 19 Jin Rong Street Xicheng District, Beijing , China Tel: Fax: [email protected] Website: China Financial Futures Exchange 10/F, POSCO Plaza, 1600 Century Avenue Pudong New Zone, Shanghai Tel: Fax: [email protected] Website: CSDCC F22-23 Investment Plaza 27 Jinrong Street, Xicheng District Beijing, , China Tel: Fax: [email protected] Website: Shenzhen Stock Exchange 5045 Shennan East Road Shenzhen, , China Tel: Fax: [email protected] Website: China Futures Association Taiyang Securities Building, No. 34 Fu Wai Da Jie Street,Xicheng District Beijing , China Tel: Fax: [email protected] Website: Shanghai Futures Exchange 500 Pudian Road, Pudong New Zone Shanghai , China Tel: Fax: [email protected] Website: Dalian Commodity Exchange No. 18, Huizhan Road Dalian , China Tel: Fax: [email protected] Website: Zhengzhou Commodity Exchange 69 Weilai Avenue Zhengzhou, , China Tel: Fax: [email protected] Website: China Securities Investor Protection Fund Co. Focus Place A, 19 Jin Rong Street Xicheng District, Beijing , China Tax: Fax: [email protected] Website:N.A

63 Special thanks are hereby acknowledged to the Securities Knowledge Manual (Editor-in-chief: ZHOU Zhengqing). All rights reserved by China Securities Regulatory Commission (CSRC). Unauthorized publication or any commercial use without a prior consent of the CSRC is strictly prohibited. The information contained herein is for readers references only, so the CSRC shall not be held liable for any consequences arising from its use